Look at Who's Paying the Nanny a $180,000 Salary

By Joshua Gans

When NPR's Adam Davidson wrote this week about a New York nanny who earned $180,000 per year plus benefits, I knew this would be something I'd have to look into. Much of the discussion about this was whether it was worth it. The implication was that nannies even earning $50,000 or $100,000 a year wouldn't be worth it.

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Are you paying your nanny too much or just enough?Are you paying your nanny too much or just enough?But what does worth it mean? Davidson looks to some utilitarian rationale:

"Many clients are paying for the privilege of not having to worry about their child's care, which means never worrying if their nanny has plans."

That is, are the services themselves worth paying for. He concludes not and, instead, ends up seeing high priced nannies as a "credence good." Something you purchase to keep up with the Joneses.

But I'm not so sure. There are many more high priced nannies than you think and they aren't just on the Upper West Side of Manhattan.

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How often is it the case that one parent (yes, usually the mother but there is a small but significant group of fathers in this category) give up a high paying job to take care of children, particularly, pre-school aged children? In each of those cases, the household is "paying" for their services in the form of what economist's call an "opportunity cost." In this case, it is the loss of the salary of the parent staying at home. If that parent would have earned $50,000 to $100,000 plus per year, that means your internal nanny service (i.e., the parent) is as extravagant an expense as an Upper West Side counterpart. In fact, it can be more so if you take into account the tax implications.

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Now you might say that what you are getting for the parent supplied services is better than the outsourced nanny services. Parents know their children, have their interests at heart, are on call all the time and mean you don't have to worry about child care. But go read the Davidson piece again. This is precisely the utilitarian services that the high priced nannies are being valued for. Once you include stay-at-home parents, you'll find that we are all paying much more for nannies than we think.

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